“We ARE serious to buy, but on our own terms”; “The buyer and seller would not agree on a $2500.00 difference of value opinion.”

“A recent coffee shop story from a Vancouver Realtor® pal claimed that a sale on a east side $950,000 home never concluded when the buyer and seller would not agree on a $2500.00 difference of value opinion.
Worthy of calculation, the $2500.00 equates to a 0.26% difference of dollar opinion which in this case was big enough to kill the deal. If you are scratching your head wondering why then there is perhaps a reason within that tells us there is more to this market than we might suspect – a reason I believe that won’t be accountable in market fundamentals.
A sentence in an email from a buyer helped clarify this 0.26% conundrum. Stated was:
“We ARE serious to buy, but on our own terms.”
– local realtor Larry Yatkowsky, at yattermatters.com, 18 Jul 2012, who described this stubbornness as ‘Mule Talk’.

There are periods during a downturn when prices are ‘sticky’; where buyers and sellers stare each other down; where sellers are reluctant to “let go” of properties where they have gotten attached to the idea of them being worth ‘x’ and now the buyer is asking them to “give it away” for ‘x-y’. Then comparables sell for less and expectations are reset.
– vreaa

As a buyer, I don’t think $2500 would keep me from buying a house I loved. But, I could understand being turned off by a seller who refused to price in deficiencies with a house. I could imagine walking from a deal (maybe even over such a trivial amount) if I was tabulating the costs needed to bring the house up to the standard it should be for the price it is commanding.

But as a seller? Seriously. $2500? Really? This just doesn’t even ripple the surface. Are margins so tight that $2500 is the difference between a deal working or not? Yikes.

– falling in love with a given house, in a market where there’s lots available, would be the first problem
– one of the few advantages of agents is keeping often emotional buyers and sellers from dealing face to face, where their emotions can sour a deal
– it might not be that margins are tight, just that the buyer thought “I can get a better deal elsewhere” while the seller thought “another buyer will come along, and I’m willing to wait”

As the market transitions, it goes from a place where agents are mere paper pushers to one where they actually have to negotiate and convince their principals to come together and make a deal. Sadly, when the markets have been in easy money/order taker mode for a long time, older agents’ negotiation skillz have atrophied, while many newer agents never had ’em.

Several valid points you make, Ralph Cramdown. ‘Remember that you’re dealing with people’ is in the business handbook somewhere.

There’s not enough information in this anecdote, but it’s fun to speculate. The deal was lost over a mutual $1250, an amount that could be buried and pop up conveniently later. Leverage, carrying charges, some intangible deadline, who knows. The difference could have been bridged with good negotiation skills, however. Maybe over lunch with phones off.

(I was in a loan once with a major bank and they wouldn’t release goods for sale unless every penny was accounted. I’d been a AAA client and dumped them when the loan was paid. It was in the fine print.)

When prices are tight, it’s worth remembering that it’s more the absolute, not percentage, value that many sellers will be looking at. If that’s the case $2500 will bee seen as a lot of money in terms of eating into the return. It’s also a big reason why prices are “sticky downwards”.

You could be exactly right on that point Jesse. I am guessing the vendor calculated the worth of 2500 dollars. Interestingly enough, .26% is 2470 dollars compounded in one year. Maybe they got their back up over losing that 1/4% when bonds pay virtually nothing. Looked at another way, if you could only get one half percent per annum on a Treasury then that quarter point represents half the return for the coming year. Holding money is clearly a poor investment. Holding real estate in a falling market is even worse. We all have to think of ways we can put our capital to work just to beat inflation of 2%.

On the other hand, losing a deal over such a small amount of money is utterly stupid. I would have given it in a heartbeat. The seller needs to consider what his time is worth. It is the price of a weeks income for a married couple. It is the price of paying to lose a headache.

How about the incovenience of the open houses, the staging, the calls and visits from the realtor? What if you delay and the buyer discovers a major deficiency? How does it look if your house sits and does not sell? You will drop the price anyway. All these considerations add up. Meanwhile you are stuck in limbo and you do not have the money in the bank.

It depends who had the offer and who’d made the signback at the time the deal died. Maybe the seller signed back to within $2,500 of the buyer’s prior offer, figuring the buyer would move to do the deal. Maybe the difference was bigger, agents subsequently contributed commission, and the buyer STILL didn’t sign. When you’re waiting for the buyer’s counter and it doesn’t come, what do you do? You have the option of submitting a better offer, but that isn’t how it’s traditionally played in the kabuki that is a real estate transaction. Once you’ve countered, the original offer is dead, so you no longer have the option of adding $2,500 for the win. You have to wait for the counter that never comes.

Maybe I’ve got it all wrong and the seller refused to cave when the ball was in his court, in which case I feel that he (with his agent’s help) was a lousy poker player and a moron.

For the seller, it might be simpler than all that, they could have hit a point where they were underwater and needed to bring money to the table or hit a point where they could no longer afford to bring more money to the table and financial physics killed the deal.

All good points Ralph. The mechanics of the offer and acceptance process can defeat what should be a simple deal. After having looked at the original article though it appears there was something of an informal discussion taking place in the background where both participating realtors made it clear they would contribute some portion of commission to make the deal work. So we know that back channels were being worked prior to offers being written. It is obvious to me that this deal failed because of simple pig-headedness and pride.

I know Brad, I remember he bought a place around 08-09. Now has a young child, not sure if the wife worked but now the main breadwinner is out of work and the prospects look grim.
Nice guy, if he has to relocate hope he doesn’t take too big of a loss. Although no one put a gun to his head to buy.

I faced a situation very similar to this seller one year ago with on offer on the table for my house for 1% (about 15k) less than I was hoping to get. But I did recognize the overheated market conditions at the time and so decided to swallow my pride and accept the buyers offer. A year later I can happily say my former house is now “worth” at least 10%, or 150k less than a year ago. Smartest decision I ever made.

Lots to argue with and discuss in that article. One point though that I generally support is that I also seriously doubt we will see a US style crash. I am not in denial here either. It is just that we have seen different dynamics play out in this country and while much of the activity mirrors what took place in the states it has been less pronounced on the risk side. Just my opinion. Much more likely is that we will see some specific markets like Victoria, Vancouver, Nanaimo and Kelowna take a harder hit while declines will be gentler elsewhere. Even those declines may not live up to the expectations in the bear camp though. Canadians in general are less negative regarding homes and prospects for the future. The Federal Government is in fairly good shape debt-wise, our CPP plan is funded and even our provinces and municipalities are less likely to face default on the basis of bond issuance. US cities have had their hearts ripped out in some cases. This does relate to how they finance municipal services in the first place. And last, there is the weather. Canadians are simply going to be less willing to walk away from their homes and their debts because this country is just too cold. It is not like hundreds upon thousands of families are going to say screw it and go live on the banks of the Fraser or Columbia rivers nor camp out in the Kootenays. Obviously living in Florida or California enables an attitude of “screw it, I won’t pay when I can fish and hunt and live in a tent” but that is just not a serious option up here. Canadians cannot afford to fall between the cracks either. There are not enough Salvation Army beds for the poor as it stands. Fact is, we are going to tough it out and pay our bills the old fashioned way. Slowly and over a long period of time. There will be bankruptcies of course but most working people will not choose that option at the risk of losing their home. Even an underwater home is a home and not a tent. Eventually it will return to its old value. And so this supports the idea that as fewer Canadians choose to default then there will be fewer pressures pushing prices down. We can therefore expect prices to remain at elevated levels relative to America for many years to come. Just saying. I have been watching this market for years and punching the numbers out. Despite being a real bear on Vancouver I can honestly say that it is my strong belief that we are not going to see the same kind of hurt the US saw. My biggest concern is actually how elevated debt levels will hurt the consumption portion of the economy and so I do expect a recession next year. We are pretty resilient in this country though and confidence is still high. A cooling period on household and mortgage debt growth was just what the doctor ordered. If we can manage expectations and keep it under control and not fall too deeply into deficits in the future we will be just fine.

Great response. I always enjoy reading your comments. I agree that this will be the case if interest rates don’t rise this year or the next. We will have a decline but not a crash. I think the decline will be exacerbated by a loss of confidence in the housing market. House prices have a very long way to slide to reach market fundamentals. Canadians will stay up nights thinking about their depreciating asset. Spending will go down and unemployment will rise.
If, however, interest rates do rise, we will have a catastrophe on our hands. I’ve talked to several friends that have never even heard the bear perspective. One friend wasn’t aware that a mortgage had to be renegotiated after five years.

Thanks Dimitri, I also enjoy your posts. I agree with your points here as well. It will not be possible to avoid rising unemployment if we do fall into a recession. Nor is there a great deal of room for increases in consumer spending given the existing high debt levels so there will be a drag on the economy for some time as debts are slowly delevered. As I noted already though I am not bearish on our economy despite the headwinds and one of the keys to my higher level of confidence in our country is the fact that our federal deficit is being addressed aggressively. There is no question that we are in a stronger position than our neighbors on that point and this factor should give us all reason to feel a sense of optimism despite the bad news that swirls around. Of course, our country is still the tenth largest economy in the world. We are a major force and a significant exporter of what the rest of the world wants and needs. Even in tough times our future is very bright.

@ Happy Islander – it depends on the state, but yes in some you sit at the same table and hand-over or receive keys, etc. As a seller, I have also received a cheque for net proceeds of the transaction as part of the process while sitting at the table, handed over to me by the escrow company orchestrating it all. I have been through it several times. It is usually a big boardroom table with each side there, along with realtors and escrow company. In one case, the sellers we were buying from seemed sad to be selling and it was a bit surreal.

Putting on my SocraticPedagogue ‘hat’ for a moment… allow to me to pose two questions… What (or who, if you prefer) is a Canadian? Secondly, for an underwater householder is the choice between staying “current” on their mortgage indebtedness really as stark as CentralHeating & GraniteCountertops vs. ColeMan Lanterns and RipStopNylon – or is that a false dichotomy?

I am way more bearish on Canada because so much of what we export goes to China to feed *their* massive bubble. A lot of our domestic production and employment is wrapped up in housing now too. If China pops it will be severe, because except for food I don’t see what a world in recession needs from this country. When commodities fall, they drop like a stone.

Farmer
Your points noted but It does not resonate with the face value of things
How else do you explain someone paying $ 4000/ month mortgage for an average take home of $ 4500/month in Vancouver. People are living on HELOCS and the only driving force here is the perception that the prices always go up and there will be more to come. It will be a quick and hard fall once this perception changes.
People are also dependent upon having strangers live in their basements to be able to make the mortgage payments. Take that away (as in the normal definition of a SFH) and all that “Canadian resilience” just melts away

There is no question that weather plays a role in our lives Nem. We are not a hot country. We do not enjoy the privilege to live comfortably and fish year round nor live without heat as many in the warmer parts of the US do.

We cannot walk away from our burdens on a whim.

As an outcome of those limitations, weather related factors play on our psyche in a way that assures we will work harder to not fail in our housing obligations. And that one major factor does indeed have a very large role in how we manage our finances and day to day affairs.

Canadians will not choose the route of abandoning their homes as an “easy out” as was witnessed across America. Nor do we have exactly the same culture and anger towards our banking system and government that our neighbors express so generously.

Do we navel gaze and hate our government? No we don’t. The public may not agree on who is the best party to be in power but if you reflect on the idea for a moment you will probably be inclined to say that as a general rule, Canadians trust the countries leadership and the decisions being made on their behalf.

Indeed we argue and fume but our confidence level is still pretty high. We feel safe as a society (whoever is in charge) and that is empowering because I believe we have trust that there will still be fairness and equity despite our differences.

You may laugh at my arguments in that respect so lets not dwell on it but I have no hesitation in asserting that foreclosures will never see the heights of the US housing crash. Quite simply, our attitude towards debt and our sense of need for home security is higher here and it is partly dictated by the weather.

It is also determined by a central belief that we have fair government.

“If China pops it will be severe, because except for food I don’t see what a world in recession needs from this country.” ~~ RP1
—————————–
Even in the worst of recessions trade does not come to a standstill, RP1. This country supplies much more than just resources. Amongst our other key exports are technology, consulting and knowledge. There was never a shallow pool of talent in this country in those areas and we can be thankful for that.

Try not to be too concerned about a China pop though. I am not in the hard landing camp because the driving forces behind the growth dynamics there are still quite significant. This is a hungry world and demands will only grow stronger over the coming years.

Even during a slowdown.

Both Potash and Uranium are very promising despite the potential for a global contraction. You may also not be aware of the incredible, and yet to be exploited, resources we have domestically of rare earths (for example) or of the needs of many countries (exclusive of Asia) for grains, metals, technological expertise and manufactured goods including aerospace and autos.

Population demands and continued growth in developing countries assure our markets will never run dry. We are a truly blessed nation and on that front I can assure you that despite being a bear on Vancouver real estate I am no bear on our nations future.

” it is my strong belief that we are not going to see the same kind of hurt the US saw.”

Depends on how you define “hurt”. The price-income ratios of Vancouver are high, as are the mortgages relative to incomes. I don’t think it’s any more complicated than that. Vancouver is a big metro and I’m having a hard time seeing how it can be spared without some income gains pronto.

As for China, I think Michael Pettis has nailed it; it looks Japanese circa 1989. Again I don’t think it’s complicated — China has overinvested in poorly performing assets and is nearing the end of a 30 year long investment boom. If GDP drops to 3-4% in the next few years — what looks like the most likely scenario — Vancouver is going to be hit hard.

The asset class to track is condos in my view. There are too many “amateurs” who have little experience with management of a multimillion dollar capital asset. Most areas on North America place a larger premium on apartment earnings, and I think it’s only a matter of time before condos turn the pariah. The true colours will come out over another couple of years as a few more % get slammed with special assessments and other “unexpected” expenses neutralizing their previous years’ gains.

Average house price to average income is a metric only. It doesn’t mean that people are actually spending 70% of their pretax income on housing (or whatever the number is), because those with incomes significantly below the average obviously don’t buy SFHs. Think about it.

“because those with incomes significantly below the average obviously don’t buy SFHs. Think about it.”

“Obviously” seems to ignore families’ relative cost bases: not everyone is buying with 25% down. Further, the term “SFH”, for the most part, should be qualified.

I find the recent detachment of detached property prices somewhat concerning, only because I see no impending land shortage and instead see hoarding of non-productive inherently scarce resources. It took me a while to understand the difference between shortage and scarcity.

jesse -> I think I see what you mean regarding the difference between scarcity and shortage: SFHs in Vancouver are relatively scarce (there may be fewer of them compared with condos, and with SFHs elsewhere in NAmerica) , but there isn’t any real shortage of them because there are lots of people ready to part with them at all sorts of prices (BTW, I’d say from current market prices down, paradoxically). So, they are relatively scarce but readily available. Is that the idea?

All good points Jesse. Sorry if I suddenly came across sounding bullish (which I am not). As you will know from many of my past comments I am not optimistic where Vancouver is concerned. It is the one true bubble in the country and price declines there could be spectacular which means they will be in line with the relative parabolic growth we have seen.

But as I have also noted before I am not an out and out doomer. The whole country is not in a bubble but is rather merely overpriced (Toronto condos being another exception) and I think that can be sustained if employment levels hold and we begin a debt deleveraging process now. The moves by Mr Flaherty have clearly made a dent in public perceptions this time around so there are some reasons to be optimistic if real estate cools off.

Progress seems to be being made where credit card debt is concerned as well. We would all probably rather not see saving rates rise too quickly though. Paying off existing debt surely comes first.

As far as China is concerned we have just seen positive news on the PMI readings and although they remain below 50 which still suggests contraction is taking place, they are rising again. I am not going to write off the country quite yet although they clearly have to work through their own bubble correction. Hopefully it takes place gradually and does not result in a so called hard landing.

I think maybe what you are hearing me say is that I no longer see the worst of outcomes happening. Nor will the most optimistic scenarios play out. If we can live in that middle ground of a low growth environment that would be quite a success and it seems it is the highest probability anyway.

Well perhaps, though “worst” is a mighty deep chasm! I don’t know what “worst” is, but I do have high confidence there is underlying economic growth, I only need look at technology and research papers to see there are great opportunities baked in for the next generation, assuming there are enough people who will finance them.

But a plausible “worst case” scenario for BC, from my POV is as follows, as a narrative:
– Europe remains in recession for several years
– China and Asia experience significant economic slowdown, (3-4% for China)
– Hard commodities experience severe bear market
– Capital flows into BC and Canada dry up
– Housing boom in US starts forcing up real rates
– Lender scrutiny of mortgage applications is increased significantly
– Population growth drops further
– BC enters recession
– Property prices drop 40% in real terms over 5-7 years (in some parts of the province we’re already part way there)

As for Canada, I don’t know but I think there is credence that high oil prices will buoy incomes to some degree and that will translate to higher house prices, however I expect that to be a relatively minor effect. There are already some signs that Canada’s in trouble; investment in manufacturing through R&D investment is a direct stimulus measure, something I had thought was coming sooner than it did but it’s here now. I expect further stimulus measures if commodity prices start showing weakness, but they will be business-focused ones. I think any movement towards facilitating consumer debt growth will be “difficult” for the next while. Ultimately incomes need to be bolstered for Canada to justify its current debt loads. I think that reality is starting to finally set in in Ottawa, and my bet is there are fervent discussions about how to raise incomes without, well, raising incomes. A dilly of a pickle for the trickle-downers.

So I have another post that just won’t seem to take. Posted it three times but it does not even go into moderation. That is the most interesting part. Let’s try again. Response to Nemesis….trial #4…….
@@@@@@@@@@

There is no question that weather plays a role in our lives Nem. We are not a hot country. We do not enjoy the privilege to live comfortably and fish year round nor live without heat as many in the warmer parts of the US do.

We cannot walk away from our burdens on a whim.

As an outcome of those limitations, weather related factors play on our psyche in a way that assures we will work harder to not fail in our housing obligations. And that one major factor does indeed have a very large role in how we manage our finances and day to day affairs.

Canadians will not choose the route of abandoning their homes as an “easy out” as was witnessed across America. Nor do we have exactly the same culture and anger towards our banking system and government that our neighbors express so generously.

Do we navel gaze and hate our government? No we don’t. The public may not agree on who is the best party to be in power but if you reflect on the idea for a moment you will probably be inclined to say that as a general rule, Canadians trust the countries leadership and the decisions being made on their behalf.

Indeed we argue and fume but our confidence level is still pretty high. We feel safe as a society (whoever is in charge) and that is empowering because I believe we have trust that there will still be fairness and equity despite our differences.

You may laugh at my arguments in that respect so lets not dwell on it but I have no hesitation in asserting that foreclosures will never see the heights of the US housing crash. Quite simply, our attitude towards debt and our sense of need for home security is higher here and it is partly dictated by the weather.

It is also determined by a central belief that we have fair government.

Farmer, such a thoughtful response is truly deserving of a longer reply than I regrettably have time to pen [at the moment]… but, in the interests of discourse and scholarly reflection, let’s briefly unpack a few of your assumptions and see where that takes us…

To begin with, my ‘rhetorical’… “What (or who) is a Canadian?” I only asked that because, by selecting ‘Canadianness’ as an important unit of analysis – by implication – one is assuming some sort of “exceptionalism” based on shared national characteristics [that old cognitive bogeyman, “It’s different here”] or, at the very least, culturally-conditioned, monolithic national responses to ‘situations’… In that regard, it is important to remember that Canada is a federal polity not a unitary state… And more importantly perhaps – from a theoretical perspective – a polity utterly lacking in the central defining feature of all true “nation states”… A monomyth or, if you prefer, the BigIdea [indeed, the closest we ever came to BigIdeas or a ‘National Dream’ had something to do with a transcontinental railway, resource extraction and land speculation].

More to the point, when we talk about “Canadianness”, it is best to remember that (and these days more than ever) there really isn’t a solitary ethno-linguistic, socio-cultural, ideological, historical, ‘one size fits all’ label we can accurately apply to the national population. Accordingly, actors’ situational behaviours, to the extent that these are influenced by common national/cultural factors, can be more accurately predicted by exploring the ‘stimuli response’ of different authentically cohesive ‘tribal’ subsets of the national polity/population [and then by aggregating those, where overlap occurs]…

Weather. Yep… it sure can get cold out there. And while one would presume that a decision to exchange a McMansion for a Yurt might reasonably be conditioned by climatic realities – the premise is flawed to the extent that it presumes that the dwelling in question is both an occupied principal residence (vs. a speculative ‘investment’ or recreational holding) and that its ultimate disposition is an act of voluntary choice. Typically, bailiffs acting on behalf of creditors don’t worry about such niceties. Yes, from a ‘market analysis’ point of view I am more concerned about inability to stay ‘current’ than strategic default, per se – although I dare say, there will be more than a few of those where the property holding entity is a corporation vs. an individual [my all time favourite example of that was the Mortgage Bankers Association of America’s strategic default on their heavily mortgaged K Street, Washington DC headquarters] – or, in those cases where severely stressed individual debtors have other residency options. And then there’s demographics [albeit that topic is best left for another day]…

Resource wealth. “This land is your land, this land is my land”… Actually, no… something to do with deeds/licenses [and let us not forget the PrerogativeRoyale]. Worryingly, ‘ownership’ of the NationalGoodies is increasingly held by offshore entities – ironically, frequently by the very sovereign wealth funds and national investment proxies of unitary states and/or their governing/economic elites with whom we are nominally ‘competing’. But of course, the crux is that there are grave social/political problems associated with all rentier societies/economies. Accordingly, Canada’s resource riches are, paradoxically, its Achilles Heel – see Hazlem Beblawi on “Rentier States” or Uncle Karl on “Rentier Capitalism”. Additionally, thanks in large part to technological advances and, to a smaller extent, on changed organizational/working practices – resource extraction takes rather fewer people to accomplish these days than was once the case (an accelerating trend, unfortunately – from mining to forestry, from agriculture to energy – and it’s always and ultimately a question of jobs)… And, finally, economic and social benefits afforded by the NationalTreasureChest of resource goodies is, ultimately, contingent upon our ‘customers’ ability to pay… which isn’t necessarily something one can always take for granted…

To conclude, I would like to briefly address your assertion that Canadians’ faith/trust in the mechanisms and outcomes of governance is such that, collectively, we enjoy a superior, more cohesive, involved, rational, non-ideological polity than do, shall we say, some of our ‘neighbours’. All I can say about that is this… Fewer than 1% of Canadians – as measured by membership in a registered political party – are actively involved in their own governance. More telling perhaps, in Ontario’s recent provincial contest more than 50% of the eligible electorate effectively voted for “None of the above”… by staying home (or whatever else it was they were doing that day). A phenomenon of declining voter participation that is by no means restricted to the provincial arena or Ontario in particular. And that brings us to an interesting observation of my own… That Canada’s HousingObssesion has (as in other jurisdictions) less to do with matters of ownership, per se than with social isolation, individual autonomy and a rejection of human collectivities/public goods/spaces.

The literature is extant… among the best of the ‘crossover’ [i.e. scholarly, but accessible] works are these:

Nice post Mr Nem. I need more coffee before I get back to you on this. You do realize I am discussing public sentiment though. In some cases that includes complacency amongst the electorate. For whatever reason we just don’t seem to get as fired up in Canada as our American friends do. Perhaps it is the polarizing effect of a two party system. Politics is a real blood sport down there as we often note by the viciousness of the advertising around elections and the way the process is funded and organized. Our parliamentry system has always struck me as being a healthier model but of course I am partial to it.

….”An important new study reveals a potent disconnect between the issues that matter most to Canadians and their confidence that government can deliver. From improving health care to balancing budgets, the more Canadians want to see things get better, the less they believe things will. “There are many issues that are important to Canadians,” observed pollster Nik Nanos. “But there isn’t a lot of confidence in finding solutions.”…”…

However… Not all of HM’s Aristos are deserving of indignation, scorn, ridicule and reproach. Indeed, if ‘Sir Nem’ were ever so fortunate as to find himself ‘enobled’… could there possibly be an Aristo more deserving of emulation than…

Alas, Dr. J… I fearest thee art right… and yet there be still hope… Patiently doth I wait… I rather fancy a Baronetcy – but a Viscountcy wouldn’t be out of the question if the price was right [always employ the Buchanan maneuver when negotiating peerages]…

[Slate] – So, You Want To Be a Lord: How to buy your way into the British aristocracy

Well thank you to everyone who responded to my comments with so many good arguments. I am inclined to agree with many of them and yet I remain skeptical that we will see a US style crash.

The thing is that in order for me to agree that we will experience the severity of an American style debt implosion I would also have to book-end that potential event by believing we will see bank failures, rampant homelessness, several million Canadians subsisting on food-stamp type benefits and a crisis of foreclosures, repossessions and bankruptcies.

I just don’t see that happening.

That is not our future. Not merely because I do not want it to happen but rather because the likelihood is slim in an environment where our public debt is reasonable relative to most of our G7 counterparts. More importantly, the deficit picture is improving and this carries with it not just a beneficial effect insofar as prestige amongst our peers is concerned but also conveys the certainty of stability in our financial sector.

Bank failure in Canada is remote due in part to how our growth model through real estate appreciation based upon low rates and CMHC commitments were designed. The aspect that bothers most writers here has been that private debt and the risk this entails were shifted from the banks and those they granted loans too onto the balance sheets of government and thus the general public. Taxpayers are now carrying the risk that previously sat on bank ledgers.

That is an acceptable sin in my books as it has enabled us to skirt the worst aspects of the credit crisis and maintain growth while minimizing the damage from rising unemployment. Confidence is still high relative to that of our peers and consumption, while susceptible to weakening is not in an actual dawn draft.

Clearly though, the process of relying upon the wealth effect of real estate growth to fund a maintenance and mild expansion of GDP through consumption is facing a slowdown and some consequences lie ahead. We will not kid ourselves in that respect. These consequences though fall within reasonable parameters provided there are no substantial economic shocks from abroad.

Despite our high reliance upon US bound exports to fund our economy we are still an insular nation in many respects and so the broad effects will be muted even if exports decline. I do not anticipate a significant decline in export demand for key materials though. Only prices will suffer for a time but this is sustainable and on that count there is no reason to believe that commodities will suffer for very long while we continue to be in a super-cycle defined in part by the massive demand from a growing global population.

Lets never forget either that amongst all the worlds producer nations, Canada stands alone as a key supplier to the globe of energy, food, technology, fertilizer inputs, building materials and consulting expertise. There is not another country on the planet with all of these attributes in combination with good governance, respect amongst our peers and a stable financial sector.

So I will repeat. We are a blessed nation.

We are not in such a weak position as some commentators believe. Perhaps my confidence comes from the facts about population growth as already noted and from known and growing demands for resources and technology. These demands are endless even during a slow period of domestic growth.

Do any of you recall that chart I posted a few days back showing the near parabolic growth rate of demand for meat from China? That one indicator is quite telling. Please consider that China itself, while stressed to meet its past goals, is still growing at a high rate. Even HSBC pegs China GDP above 7% annualized and this is during a period of slowdown and a contraction of PMI readings.

Furthermore, a significant shift has been underway following pressure from the US for Yuan revaluation which has met with some success while simultaneously a new growth model is being built around an expansion of internally generated consumption, higher interest rates for savers, rising incomes and less dependence on exports as the means to drive that economy.

Many people do not recognize that China has become a key partner of the West where issues of economic sustainability are concerned. Too much emphasis has been placed upon seeing China as a competitor but this view is out of date and in fact we have collectively used China as a crutch through much of the period since the Global financial crisis.

While I agree China, which has been the economic engine of the world these past few years, is showing some signs of stress I also believe that the stress effects will ultimately be muted simply due to the very high level of domestic demand for goods and services there. An actual China recession involving growth numbers in the red is almost impossible given past momentum and future projections.

And seriously, would we applaud such an event anyway? It is clear we need each other.

As we have seen these past few days, China has taken a significant interest in the Canadian Tar sands and our oil companies. Energy is short in much of Asia and demand is strong if not unlimited. Literally dozens of nuclear reactors are either currently under construction or in the immediate planning stages. Coal use remains high despite a slowdown in steel production. In the big picture we need not be concerned for energy demand. It is only the interim that gives real pause.

China may slow but Canada need not be concerned. Even in a downturn we are a major supplier of both the technologies demanded and the basic resources like uranium, coal and oil. The money is not running out on projects that sit in design or go through multi decade construction periods. Lets relax. A lot of this stuff is very long term and it will not end unless an actual collapse of the financial world happens (that is all doomer claptrap of course and I do not subscribe to it….nor should you)

So to sum up (since I am overtime now). I remain skeptical that a housing bubble burst in Vancouver will seriously damage our economy. Nor do I foresee a crisis evolving from somewhat overpriced homes in other jurisdictions. Even Toronto does not give me the shivers while excess condos are being splashed all over the local news rags. There is no crisis of confidence in our political sphere nor serious doubts amongst the public about the day to day operations of the country.

So what is our real worry? Is it banks?

Personally I would not hesitate to invest in Canada. We are attracting foreign capital and investment at a very good rate. We are triple AAA rated, have a federal deficit that is under control and a banking sector second to none. I would not hesitate to invest in our own resources and our own financial markets even through a falling R/E market .

That is just how I feel. And that is sentiment that speaks to our strengths.

I think you’re delusional. Does anyone doubt that in Spain, people tried this? You can’t even declare bankruptcy in Spain. People have no way at all to escape their obligation. But still the price was wrong, and people are trapped, and the country is sinking! The whole country!

So maybe Canada can print. We can cut the currency in half so house prices are normal. Wages will stay the same and the cost of everything else doubles or triples. Interest rates will skyrocket. Hooray for socialism!

Large scale bankruptcies and foreclosures may be harsh, but it is a quick way forward based on capitalist principles. By propping up the unsustainable, we are denying people opportunities and making the country poorer in the long run.

That is a good question, Vreaa. Without putting a hard number on it I would say that I expect a correction to ultimately reflect most of the parabolic increase. That means the correction will be steep. For Vancouver, my outlook is much less optimistic than for most other markets simply as a reflection of the level of excess we have seen here. The reason of course is that Vancouver is the one true bubble market in the country and by virtually every single metric we have available for taking a measure it is unsustainable. The very rapid drops in sales we are now seeing should be alarming for anyone who is trying to sell. As we know from the US experience it is quite irrelevant what average of median prices are during the downdraft if buying goes cold and effectively ceases. We are now seeing that and so it must be dawning on some late-to-the-party vendors that they will never get to harvest their homes theoretical value. Only sharp price drops will entice buyers to come back in. Quite frankly, I am expecting a hard correction for Vancouver over the next 18 to 24 months but I am reserving judgment on most of the rest of the country where prices are merely high rather than insanely over valued. It is important we draw distinctions between the markets here. Canada is a big country and so declines will not be equal everywhere although in general we can already see that demand is flattening nationally. What I worry about is that a lot of negative publicity over Vancouver’s impending correction might seep into the psyche elsewhere, hurting values in markets that might otherwise be immune. For those other regions it is employment levels, rents and incomes that will dictate market strength and provided these hold the declines should not be severe. As well, the process by which foreclosures take place in Canada will tend to mute the fall. This was recently addressed by Garth Turner over on his blog and I think it is noteworthy. The idea that Canadian markets will be flooded with a million or two foreclosed homes as was witnessed in the US is unlikely. I would be happy to see others tackle this subject in more detail in the future as it will have a bearing on how steeply we correct nationally. Any process that allows price support to hold steady as markets slow is acceptable and we should hope for that rather than encourage the correction to play out too quickly. We all live in this sandbox called Canada. Even renters will suffer if the market drops too fast and the prospect of a US style fall (which was basically a situation that policymakers completely lost control of) is not something we want to encourage. Capital Economics Mr Madani’s prognosis is more severe than my own where national average declines are concerned but I will agree that Vancouver is heading into a dark period. One thing that I do feel sure of and it is this…..the corrective period will be a long one and will take many years to play out. Possibly as long as a decade during which time we will collectively delever our burdens and obligations that were accumulated during the last few years. We need not panic. Neither should you plan on buying a housing anytime soon if you cannot cope with the broad downside that is inevitable. The process will be long and slow. This is a coming period of time (in my opinion) to pay down debt, save and invest in income producing assets that do not necessarily include residential real estate. It is almost past time to get our houses in order.

Farmer -> Thanks. I think I understand your broad position. Canada will eventually prevail, sure. We’re not looking at civil war or dirty thirties or anything like that.
But, when you say “correction to ultimately reflect most of the parabolic increase”, what ballpark percentage drop are you guesstimating?
You may recall that I expect 50%-66% peak to trough (real).
The point is that, with the RE related industry now representing about 25% of our GDP, and with the knock-on effects that Vancouver could experience with substantial price drops, it is hard to reconcile a rosy economic outlook for BC with expected large RE price drops.

A rosy outlook for Vancouver and for the province would not be my expectation. As you will know I have already stated I believe a 50% decline is possible. I will admit though that when I made that comment it was somewhat flippant and not very thoughtful. Truth is, a 50% price decline would be devastating on so many fronts even if it is possible. I am not onboard with a 66% drop though, just to be clear. I truly hope we never see anything so severe as either of those figures. So I am reluctant to put an actual percentage value on the coming decline though. There are just too many variables at play. If we see a correction take place over years versus months then the combination of slow economic growth domestically and incomes gently rising will greatly modify the worst case scenarios. But there are no guarantees. Unfortunately, bubbles don’t tend to burst slowly and over long periods of time so we had best be prepared for a hard landing. My estimate is for averages to fall ranging between 30 to 40% over the next 24 months before striking a plateau. It is frankly hard to imagine any correction coming in below those numbers. We will assess again after two years but in the meantime you can count me amongst those who are very worried as some of the most dismal sales numbers on record are now being posted. I wish I could be more optimistic.